Suppose you have a competitor who has begun to dump: reduce the price of goods that are also represented in your assortment, not complying with the manufacturer’s recommended margin. What should you do?
Put the price even lower by starting a price war?
If that’s your answer, this article will be of use to you.
A bit of theory to begin with. Dumping is the practice whereby a company lowers the price of a product to a level below the average market price or recommended purchase price to create higher demand. Price dumping always means selling at a very small profit or even at a loss to yourself. Most often its purpose is to gain market share or, in extreme cases, to establish a monopoly.
Entering a Price War: What the Possible Consequences Are
At first, sales will increase. But because a particular pool of products will be sold at a lower price, in the short term, your profits will fall.
If your competitor’s financial resources are more significant than yours, you will reach the lowest price at some point, meaning you cannot afford to dump it further. So you risk losing more profits and market share in the long run.
Vendor earnings will decrease in the long run due to the turnover drop. For retailers involved in a price war, selling goods with minimal (or no) income will eventually become unprofitable, and sales volumes will drop. If the vendor does not control the pricing, does not monitor the violation of RRP, or does not intervene in the price wars of sellers, the latter in time may lose interest in the promotion of its products. Everyone would be at a disadvantage.
- For the competitor who dumps
Again we return to the question of who has a larger margin of safety. If a big business is fighting a price war, it will eventually drive competitors out of the market by aggressively lowering prices. Consumers have fewer choices, and eventually, the company that has gained significant market share will gain “price power” and be able to raise prices.
- For a business niche or an entire industry
Price wars can lead to a precipitous drop in revenue for an entire niche or industry.A classic example is the airline price wars in 1992. At that time American Airlines, Northwest Airlines and other American air carriers were fighting for the lowest prices. This resulted in unprecedented volumes of air travel and… unprecedented losses. It is estimated that the US airlines losses in 1992 were greater than all of their historical revenues combined.
Consequently, price wars can create economically devastating and exhausting situations that cause extreme damage to individual companies and the profitability of an entire industry.
How To Fight Competitors’ Dumping In E-commerce: an Algorithm
Know your profit rate and price floor
Use price monitoring by comparing your offers with those of your competitors. Based on this data and the profit rate, you can highlight the prices with which you cannot compete, i.e. the price floor.
Pricer24 allows you to compare yourself with your competitors and change your pricing strategy. If you can’t reduce the price of certain products, find a segment where you can – look at more profitable products where a price reduction won’t be a disaster.
Use the products with low CPA
Pay attention to the products that don’t make much profit but sell like hotcakes – products with a low CPA (price per acquisition) can be used to minimize losses. Since you’ve probably already gotten a lot of web traffic on the pages with these items, you can use it to drive sales of your more profitable products. Apply “this product is commonly bought with” or “similar product” recommendations to the product page, the checkout stage, or add it to a post-purchase transactional email.
Work on the average purchase amount
Pay attention to your best sellers. If there is a price war with competitors on these SKUs, think of a mechanism for cross-selling more profitable items. Take a closer look at related products that generate more income.
A classic example: we have a phone which makes us $1 and a phone case which makes us $10. Goods sold at market price will eventually encourage customers (or serve as an entry point) to buy the best seller and cross-sale will help keep the profits.
The higher your average check is, the higher the ROAS for those customers is.
What Else Can You Do? Tips For Retailers On How to Deal With Competitors’ Dumping
Constantly improve business terms from the supplier
To beat cheap competitors at their own game while remaining profitable, test a hypothesis: Perhaps your competitor’s lower price is because he buys this product on better terms? There could be two possibilities: either your competitor has found a cheaper supplier, or you have a common distributor working with you on different terms.
In the first case, you might consider changing suppliers, and in the second, you might try to negotiate better terms with the distributor. In communicating with your partner, we recommend using this wording: “What can my store do to get lower wholesale prices than we have now?”
Monitor vendor markups
From our experience: manufacturers are gradually coming around to the need to monitor the pricing policies of retail stores for their products. If the vendor or distributor does not control the price in the market, you can do it yourself. Using the data from Pricer24, you can provide the vendor with information about a competitor violating the markup, asking the vendor to respond.
Monitor shortages and demand trends in the market
Price is critical, but how will a customer buy something if it’s unavailable? When your competitors run out of stock, you can give customers what they want. If a product is unavailable or just harder to find, this can lead to customers buying it at a higher price. Use this as a chance to keep your profits without worrying about competition. Pricer24 will quickly show you similar windows of opportunity – find segments where demand is not properly met.
And the last but not least
Using Pricer24, you can see other methods your competitors use to fight for the customer.
For example, you manage the Smartphones category of a consumer electronics store. With Black Friday coming up, you want to see your competitors’ promotions. At Pricer24, you can see both the total number of promotions running and their terms and conditions. Are there any giveaways you can add to your prices for free (we know nothing is free, but we’re talking about marketing messages here)? For instance, offer your clients free shipping, return, or product set-up. These small steps toward the customer can make a difference when you can’t change your prices.
To stay ahead of your competitors, you must be aware of the market situation both now and over time. By keeping up-to-date with your competitors’ prices and assortment changes in Pricer24, you can react quickly and implement various strategies to stay competitive. In addition, pricing automation will free up specialists’ time for more complex tasks, allowing you to focus on growing your business.